The purpose of this article is to discuss my analysis and investment decision of Alcoa in the second quarter of 2013.
In the second quarter of 2013 I began hearing about the basic materials company Alcoa. Most of what I heard was poor news surrounding the firm and its industry. As a value investor this piqued my interest. A few of the news headlines surrounding the firm were…
- over supply of aluminum in the market
- Alcoa over capacity
- Alcoa's tumbling stock price
With this information I began to research these headlines and discern what they meant for the company.
The oversupply of aluminum seemed to be a direct consequence of the recent sluggish economy and low demand for products. As a producer of aluminum, this was hurting Alcoa's bottom line. With low demand for aluminum, Alcoa found itself in a situation of over-capacity with regards to its smelting plants. Big plants with nothing to do meant high inefficiency.
Sales were hit hard in 2008 and 2009 in the midst of the global recession. In both years the company posted losses.
During the recession and in the years after, investors sorted through the news: poor industry conditions, over-capacity, and net losses. With these headlines, investors sold Alcoa down in to single digits. In 2012 and early 2013, Alcoa stalled near $9 per share - a number which hadn't been seen since the mid-1990s and a far cry from $30 per share which it comfortably traded at before the recession.
Through all of the doom and gloom news which surrounded the company, I saw a silver lining in the firm. This silver lining was the fact that many of the issues which investors pointed out about Alcoa weren't specific to the company, but rather results of more market wide influences. As a company with a high 2.0 beta, Alcoa's price was especially suffering. By 2012, the U.S. equity market already had a few years of gains under its belt. It seemed to me that this was a case in which a firm and its industry had obviously been hit hard by the recession, but there were no reasons to suspect that they couldn't come back in full force just as the overall market had. Apparently Alcoa and aluminum just needed a little bit more time.
Even though Alcoa was at the mercy of market conditions, it was showing leadership in its industry. The firm took a series of active steps to curb or close inefficient smelting plants to lower its capacity and increase efficiency in the midst of low aluminum prices.
Also, the firm had been engaged in diversifying its revenue sources. Alcoa was not only a producer of aluminum, but had divisions in global rolled products and engineered products and solutions. Different revenue sources meant some protection from the downward pressure on the aluminum commodity market.
In my opinion, the concerns surrounding Alcoa didn't justify its super low stock price. The issues fingered which caused fear were a consequence of a high beta and poor temporary market conditions - nothing that wouldn't come to pass as the overall market continued to pull out of the recession. This analysis along with the strength of Alcoa's management decisions, diversified revenue sources, and U.S. leadership were the main reasons for my purchase of the stock in 2013.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.